Standard & Poor’s (S&P), according to the New York Times, is growing increasingly concerned that many companies in the United States could find it difficult to refinance their enormous debt loads in the coming years, possibly leading to an explosion of defaults and bankruptcies. Of particular concern are companies at the low end of the ratings scale, S&P said in a report released on Wednesday. These companies have been aggressively refinancing their debt in the second half of 2009 and early 2010. Already through 31 May 2010, 36 global corporate issuers have defaulted on bond payments. The sovereign debt crisis in Europe, along with lingering uncertainties about the strength of a U.S. recovery, and concerns that the American economy may slip back into recession, seems to be curbing investors’ appetite for speculative-grade debt, or junk bonds — and in many cases, the culpability of Wall Street firms and Big Banks in precipitating the economic crisis have soured many investors to investment risk in general.
American companies currently have more than $1.7 Trn in S&P-rated bonds and loans maturing from 2011 to 2014. The total debt load coming due will climb steadily over the next four years, with the proportion of debt in the speculative category growing, the credit rating agency said. In 2011, there will be about $300 Bn in debt due, of which 41% is considered speculative. But by 2014, the amount of debt due climbs to about $550 Bn, 72% of which is speculative. This should be of concern because corporate expenditures and capital investments account for roughly 20% of U.S. GDP, and over 40% of total U.S. employment. A substantial default rate in this sector could have considerable negative economic impacts.
“We believe that many borrowers at the low end of the ratings scale will encounter serious hurdles to their refinancing needs in 2013 and 2014,” John Bilardello, a managing director at Standard & Poor’s, said in the report. “Unlike investment-grade entities, for which the main issue is the rising cost of capital, speculative-grade borrowers may find that financial institutions and investors are wary of lending to them.”
Much of this debt currently owed by American companies was a result of heavy borrowing during the leveraged-buyout boom, which lasted from 2005 to 2007. Private equity firms borrowed enormous sums of money from banks to finance the buyout of companies and then loaded the target companies up with debt. But the target companies have since had a hard time paying down their debt because of the down economy, which blunted profits.
S&P believes that these companies have been successful in pushing back their debt maturities past 2010, avoiding a potential rash of defaults and bankruptcies this year. The credit rating agency fears that the continuing sovereign debt crisis in Europe will deter investors from buying up any speculative debt, including the debt of American companies.
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Source: NYTimes, Naked Capitaism Video: Bloomberg BusinessWeek
